The term “cryptoeconomics” causes a lot of confusion. People are often unclear on what it is supposed to mean. The word itself can be misleading, as it suggests that there is a parallel “crypto” version of the whole of economics. This is wrong.
In simple terms, cryptoeconomics is the use of incentives and cryptography to design new kinds of systems, applications, and networks. Cryptoeconomics is specifically about building things.
Cryptoeconomics is not a subfield of economics, but rather an area of applied cryptography that takes economic incentives and economic theory into account. Bitcoin, ethereum, zcash and all other public blockchains are products of cryptoeconomics.
To understand why the coins on these blockchains have value, we first need to understand what money really is and what makes it valuable.
In the most basic sense, money facilitates trade. In earlier societies, money could be a bag of flour, a fur hide, or even a goat. It could be anything, as long as the person receiving it deemed it valuable enough to provide a good or service for it in return. For hundreds of years people traded goods and services directly, and money as we understand it today didn’t exist.
Let’s say I have a farm with an excess supply of wheat. I could offer a bag of wheat to the local shoemaker for a pair of shoes. For this transaction to happen, I need to want shoes, and the shoemaker needs to want wheat. But what if the shoemaker doesn’t want wheat? Or I had a bad harvest and don’t have enough wheat to spare? If I don’t have something the shoemaker wants, I can’t use his services.
This was a real problem. Different people needed different things at different times, so no one could guarantee that they had the required items to make a successful trade for even the most basic amenities they needed to survive, like food or warm clothing. People needed something that was valuable to everyone all the time. So instead, they started trading coins with each other that acted as placeholders for value. And what made these coins special was that everyone agreed they had the same value.
This gave people the guarantee they needed: they could always trade coins for any good or service, which made them want to collect more and more coins, because the more coins you had, the more things you could trade them for.
Fast forward a few hundred years, and you can see the basic premise of money hasn’t changed much. We all agree on what a dollar is worth, and each of us has a certain number of dollars, which we use to get goods and services. We also provide goods and services to get more dollars. The only thing that makes our dollars valuable is that we know we can use them to get things. That, and the fact that we can’t just magically produce them whenever we want.
So for money to have value, everyone needs to agree to give it value, and it has to be scarce. So how does Bitcoin achieve this? Bitcoin’s promise of a decentralized currency is very valuable. It functions like digital cash - it has all the convenience and speed of digitally transferring money, without having to rely on a third party like a bank. These properties, as well as the security in the network that ensures they can be fulfilled, makes Bitcoin something people want to assign value to.
With bitcoin, you can send money across the world in minutes, without having to worry about exchanging currencies or going through intermediary banks. You also know that your bitcoins have value on an international level. So you’re not tied to your bank, or your particular country per se. Some of the biggest markets for bitcoins are in countries like Greece or Venezuela, where their national currency’s value is very unstable. With Bitcoin, people in these countries know that their assets won’t suddenly become worthless when their national economy takes a hit. This is an offer people find very appealing, because it goes a step further to give your assets value on the international market and facilitates direct trade on a global scale. Other tech companies tried to come up with digital cash couldn’t get around the problem of trust.